Quiver Quantitative - The Federal Reserve's monetary policy outlook experienced a notable shift as bond traders adjusted their expectations for rate cuts in 2023 and 2024, influenced by strong U.S. manufacturing data. The probability of a rate cut by June plummeted below 50% following an encouraging ISM manufacturing report, which indicated expansion for the first time since 2022. This shift in market sentiment was further cemented by the rise in two- to 30-year Treasury yields, witnessing one of their most significant daily increases this year. The recalibration in the bond market, sparked by robust ISM data, signals a possible deviation from the anticipated easing path outlined by Fed policymakers.
As bond traders reassessed their outlook, the market absorbed the implications of both the recent ISM data and cautious remarks from Fed Chair Jerome Powell. Powell's comments, paired with the release of personal income and spending data, suggested the Fed might maintain higher interest rates for an extended period. Despite strong consumer spending, stalled progress on inflation has led to a more cautious approach from the Fed, with no immediate plans for rate cuts. This realignment in expectations came after Fed Governor Christopher Waller advocated for a reconsideration of the extent and timing of anticipated rate reductions, underscoring the strength of recent economic data.
Market Overview: -Reduced Expectations for Fed Rate Cuts: Strong US manufacturing data dampened hopes of significant Federal Reserve rate cuts in 2024. -Bond Sell-Off: Treasury yields surged on the day, reflecting less anticipated monetary easing by the Fed. -Corporate Bond Market Active: The first day of the quarter witnessed a robust slate of corporate bond offerings.
Key Points: -ISM Manufacturing Surprise: The March ISM report, exceeding economist expectations, caused a reassessment of the Fed's policy path. -Data, Powell's Comments Shift Market Sentiment: Recent economic data and cautious remarks by Fed Chair Powell fueled the reduced expectations for rate cuts. -Resilient Economy, Stubborn Inflation: Strong economic indicators coupled with slow progress on inflation control suggest the Fed remains cautious about easing rates.
Looking Ahead: -March Employment Data: Friday's jobs report is anticipated to show a slowdown in job creation, but the unemployment rate likely remains low. -Corporate Bond Issuance: Continued robust corporate bond issuance suggests businesses are not overly constrained by current interest rates. -Bond Market Direction: The future trajectory of bond yields hinges on incoming economic data and the Fed's evolving stance on monetary policy.
In the backdrop of these developments, the labor market continues to be a focal point. The forthcoming March employment data is anticipated to indicate a slowdown in job creation, yet unemployment rates remain historically low. This labor market resilience, combined with strong corporate bond issuances and a surge in crude oil futures prices, paints a picture of robust economic health, potentially influencing the Fed's policy decisions.
Meanwhile, the Treasury market has seen its first monthly gain since December, following losses driven by changing expectations for Fed rate cuts. The initial high easing expectations for 2024, based on the assumption of a slowing economy due to previous rate hikes, are being reassessed in light of surpassing growth data and a slower-than-expected decline in inflation. This dynamic scenario underscores the complexity of predicting monetary policy amid fluctuating economic indicators.
This article was originally published on Quiver Quantitative